Labour rift on NHS tax widens

PETER MANDELSON urged the Government yesterday to consider all options, including compulsory social insurance and a ring-fenced health tax, to fund the NHS in a move which will infuriate Gordon Brown.

In an interview with The Telegraph, Mr Mandelson, who remains politically close to Tony Blair, said nothing should be ruled out in the debate about how money to pay for improvements in health care should be raised.

The former Northern Ireland Secretary, said that the Government had to enter into a "contract" with the public which helped voters see the link between the tax they paid and the services they received.

One option would be to introduce a special tax, earmarked for health. Another would be to move to a system of social insurance, under which people paid into a personal sickness fund.

"These systems must all be properly examined," the MP for Hartlepool said. "I don't believe we should rule out any models of public financing of health care."

He opposes social insurance, which is used in several European countries, and has said he would have reservations about creating a hypothecated health tax.

However, Mr Mandelson's remarks reflect growing tension between 10 Downing Street and Numder 11 over the future funding of the health service. Although he has twice been forced to resign from the Government, he speaks regularly to Mr Blair.

Alan Milburn, the Health Secretary, and Charles Clarke, the Labour Party chairman, are among those pressing for a hypothecated health tax in order to link the money people pay to the service they receive.

Mr Blair's advisers are also considering whether social insurance would do the same job. "Everything's up for grabs," said one official.

Mr Mandelson said reconnecting tax with public services was crucial.

"If the public is going to be persuaded that it's a good thing to pay more they have to be convinced that the increased tax is going to be dedicated to further improvements in public services.

"They also have to be satisfied that there are genuine improvements under way and they are not throwing good money after bad."

He pointed out that, in the Commons, Mr Blair had "carefully coupled" raising money through taxation and social insurance, contrasting these publicly-funded options with private health care.

The Prime Minister described the system used on the continent as a "form of taxation" because contributions were compulsory.

Mr Mandelson, a key figure in the attempt to remove Labour's image as a "tax and spend" party, said Mr Blair could now make the case for higher taxation because the "centre of gravity" of public opinion had changed.

"People didn't trust the Labour Party - they thought taxes would simply go up and up and they would be thrown at public services that weren't improving," he said.

"That has begun significantly to change. I'm not saying that people are clamouring to pay more tax but they see the issues differently."

Michael Howard, the shadow chancellor, said Mr Brown had "painted himself, the Prime Minister and the Government into a corner".

"The biggest difference between Britain and other countries where health care is better than ours lies in the extent to which they bring in private sector resources."

Derek Wanless, the author of the Treasury report on health service funding denied that he had ruled out alternative funding mechanisms.

However, Mr Brown's commitment to a tax-funded health service could avert a revolt by unions and Labour MPs over plans to increase the role of the private sector in public services.

John Edmonds, leader of the GMB, said: "His commitment to ensuring that the public services remain publicly funded will have gone a long way to reassuring many of our members."